Treasury Launches Floating-Rate Notes With $15B Auction

By Michael Aneiro

Get ready for floating-rate Treasuries. The Treasury Department just announced that it will auction $15 billion of 2-year notes on Jan. 29, marking its first new security offering since the advent of Treasury Inflation Protected Securities, or TIPS, back in 1997.

The move comes after interest rates rose sharply last year, putting an abrupt end to a 30-year bond bull market and giving investors a taste of interest-rate risk in the form of price losses that hit existing fixed-rate bonds when rates rise. Floating-rate investments, which pay coupons that can adjust based on prevailing market rates, saw a surge of investor interest, but such product offerings tended to be limited to riskier forms of debt like bank loans. Now investors can bypass the credit risk and get floating-rate debt straight from the government.

Still, they’ll only be offered in 2-year maturities for now and will remain a niche product. Bank of America Merrill Lynch rates strategists today said money-market funds will likely represent the largest investor base for Treasury FRNs. BofA added that it expects the FRN program to succeed two of its stated aims: helping the Treasury expand its investor base and supporting its debt-management goal of extending the average maturity of Treasury debt.

Floating-rate notes “bring additional diversity to Treasury’s current portfolio and help support our goal of saving taxpayer dollars by financing the government’s borrowing needs at the lowest cost over time,” said Mary Miller, the Treasury Department’s under secretary for domestic finance, in a statement, adding that the program has been in the works for three years. The Treasury said it expects to auction additional new FRN securities quarterly in April, July, and October.